Philippine Stock Market Research

Deliver Us North!  The 2011 PSEi and Philippine Stock Market Outlook.

Can the PSEi still advance after reaching 4,000?  This is probably what’s on investors’ minds nowadays, and it is reflected in the PSEi’s sideways movement after setting foot on new territory.  To answer this, we checked the PSEi’s temperature to see if it’s overheating and the individual sectors’ growth drivers and financial conditions to see if profitability has a reason to go up and if the sectors have healthy balance sheets to do so.  Barring any external shocks, this may show where the PSEi’s compass is pointing.

Market Temperature

Last time the PSEi overheated was in 2007.  It’s not because of the US sub-prime crisis which took down world market indexes from July 2007 to 2009.   It’s because the quality of bargain stocks became poor that time.  There were limited value stocks to Buy.  Based on July 2007 prices and bond yields, there were 13 bargain stocks and eight reasonably-priced premium stocks at that time for a total of 21 stocks with favorable value.  There was not even one property stock that is a bargain stock that time.  After passing 1Q07, 2007F projections must have pointed out that the PSEi then have become very expensive.  July 2007 was the PSEi’s last peak, and without the US sub-prime crisis, it may have just corrected and moved sideways throughout that year.

October 2010.  We’ve gone through a semester of disclosed earnings, some companies with 9M10 results already and 9M10 worth of info and developments that fine-tune 2010F projections and 2011F company outlooks.  The average bond yield is 6.01%.  There are 21 bargain stocks and ten reasonably-priced premium stocks based on 2010F projections.  There are plenty of stock choices here unlike in the previous peak in July 2007.  Do you know that SMC, the Philippines’ biggest food and beverage (F&B) company that is going into the business of nation-building is a bargain stock?  Just mentioning this shows how rich the quality of value-stocks we still have even at the 4,000 level.  21 and ten, and we’re still at 2010F values.  When we reach 2011F and more info and developments confirm and affirm 2011F projections, our direction is still north.

Sector Growth Drivers and Financial Condition

Now it’s time to check if there are still growth prospects and if the finances of the companies in the individual sectors can support this growth.

F&B – F&B is highlighted with JFC and URC’s overseas expansion and demand from a growing middle class and younger market segment.  In the restaurants, bars, groceries and supermarkets, have you noticed more and more products being offered to the latter market mentioned?  Just in beer and hard liquor alone, there are already “choices”.  On a side-note, that “bee” is also getting plump acquiring competitors in the fast-food market.  Who’s next after Mang Inasal?  Max’s (120 branches), Barrio Fiesta (12 branches and into processed foods also with presence in 35 countries worldwide), Tokyo Tokyo (56 stores), Zagu, fish-balls stands?  The bee doesn’t have Japanese fast-food yet.  JFC’s next target is an area of speculation though.  Going back to F&B, the sector is the only one with a strong financial condition.  We like GSMI, SMC, RFM and AMC in this sector.

Power and Utilities – Dire need highlights this sector.  There is the dire need for more MWs especially in Vismin. There is dire need to reduce Non-revenue Water (NRW) in the provinces.  MWC has projects to do the latter in Laguna and Boracay.  AP also plans to increase generated power by 250 MW on top of its upcoming plants in 2011.  This sector is poised for long term growth.  It is capital-intensive so liquidity is not rich, but free cash-flow (FCF) is already in another level because of new earnings from additional plants and higher price levels due to WESM and the PBR-scheme (for distribution companies).  We like FPH, FGEN, AEV and SPC in this sector.

Property – There are lots of growth drivers in this sector.  The O&O industry is still up and up and expanding in the provinces.  Tourism will take another boost if Pagcor City pushes through.  If not, local tourism is still riding on its tracks because of promotion and new sites in the provinces.  The condo lifestyle has developed in the CBDs due to the negativity of traffic and typhoons and the preference of a second home near the workplace.  Remittances are still rising, and SMPH and ALI are in China.  This sets the pace for overseas expansion.  Liquidity though is not that good in this sector but FCF is favorable.  We like RLC, FLI, VLL, ETON and CHI in this sector.

Telecoms and Broadcasting – Based on individuals in the Philippine population, market penetration in the fixed-line and mobile broadband market is only around 10% as of this time.  There’s more room for growth.  Ad spending in the medium of television is also growing in Asia based on Nielsen Research thus benefiting the TV broadcasting sector.  Like Power and Utilities, liquidity is not that good but FCF is favorable.  We like GMA7 in this sector.  Unlike the other stocks in this sector, it is highly liquid and has residual value.

Transportation – Local tourism and trade (for ATS) and overseas expansion (for ICT) highlights this sector.  Liquidity is not that good being a capital-intensive sector, but FCF is favorable.  We like ATS in this sector.  Do you know that this stock is trading below its Estimated Liquidation Value?  This is the value when you convert all of its ships and assets into cash.  We did not even put a value on its ships though they are good vessels.  No value assumed on the ships of a shipping company, and its current price is still favorable.  That’s how undervalued ATS is.

Banks – Loan growth has risen from its slumber and Philippine banks have healthy risk-based capital adequacy ratios.  The average for the eight banks we cover is 16.07%.  This is way above the 10% and 8% statutory reserve of the BSP and BIS, respectively.  We like the banks RCB, UBP, CHIB, PNB and SECB.


There’s an air of bearishness in the short term because of probable damages from Typhoon Juan and the wait-and-see stance of investors to digest 9M10 results first.  It’s also 4Q10 and investors may be in the wrapping-up mode for the year already after favorable gains from the run to 4,000.

The conditions look good for 2011 like a rocket about to take off.  Market temperature, “Go flight”, sectors growth drivers, “Go flight”, sectors financial condition, “Ok”.  We recommend positioning for 2011 as early as now.  Stock prices are also easing to more favorable levels further increasing choices and preferred buying levels.


The Philippine Stock Market Research report is solely for information.  It should not be constituted as an offer for solicitation for the purchase or sale of securities mentioned.  The information herein has been obtained from sources believed to be reliable.  Whilst every effort has been made to ensure accuracy, we do not guarantee the accuracy or completeness of the report.  All opinions and estimates expressed herein constitute our judgment as of this date made on a reasonable basis and are subject to change without notice.  No liability can be expected for any loss arising from the use of this report or its contents.  As this is general information, it does not have regard to the specific investment objectives, financial situation and the particular needs of any specific person who may obtain this report.